A downgrade for Qantas, a lesson for Australia's economy

William Pesek

Moody's Investors Service last week did Australia's 23 million people a great service by junking their national airline, Qantas Airways.

The 93-year-old Qantas commands a prominent place in the Australian psyche, in the nation's global image of itself. The name of the so-called Flying Kangaroo is an acronym for ''Queensland and Northern Territory Aerial Services'', and the words ''Spirit of Australia'' are painted on each of its aircraft.

'Another Qantas irony is that it played a huge part in globalising Australia.'

So to be downgraded by Moody's to junk status - following Standard & Poor's move last month, and amid a record first-half loss and 1000 job cuts - is quite a blow. It does not help that Qantas is only the latest Aussie brand to fall.

Last month, General Motors' Holden unit, Australia's largest car maker, announced it would begin shuttering production lines after 69 years, joining Ford in exiting an economy that is struggling with high costs and a strong currency - the same headwinds that have clipped Qantas' wings.

Odd as it sounds, these corporate shocks come at a serendipitous moment. They provide a much-needed wake-up call to officials in Canberra and corporate executives alike to act decisively to raise the nation's competitiveness. Qantas is not a unique story. Like Japan Airlines, for example, the company has long been spoiled by its monopoly status and government support. Let's face it: airlines tend to be a pretty bad business, and Qantas dined out too long on its rarefied status and never evolved to survive globally. (An ironic factoid: In 1935, Qantas' first international flight took off from Darwin, a city named in honour of Mr Evolution himself.)

In many ways, the same could be said of Australia's entire economy, particularly as China begins to slow down. Thanks largely to China's demand for its vast stores of iron ore, copper and coal, Australia grew complacent. Economists call it ''Dutch disease'', whereby the benefits of exporting natural resources lead to the neglect and atrophy of other industries.

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The nation's business culture also has depended too long on its distance from global markets to limit outside competition.

Another Qantas irony is that it played a huge part in globalising Australia, both in terms of ferrying in investors and tourists and carrying out cargo. But we are seeing with Qantas, Holden and Ford that certain key, high-cost-base sectors have a hard time thriving in an increasingly dynamic world. This challenge is not about to go away, not with airlines, retailers and car makers around the world - including the US - rapidly innovating.

For decades, a captive domestic market enabled Australia to delay improvements in infrastructure, education, and a tax regime that encourages all too many smart workers to head overseas. To understand why that is no longer possible, look at how Virgin Australia navigated around Qantas. Rather than targeting his competitor's weaknesses, chief executive John Borghetti is going after its strength. That has meant attacking Qantas head Alan Joyce's near-monopoly in Australia's non-budget domestic aviation market, buying smaller rivals, adding business-class seats and building slick airport lounges.

One more irony worth noting: Borghetti lost out to Joyce for the top job at Qantas. The company's board may regret that call as Virgin flies high while the celebrated Qantas loses altitude.